MCHP Q2 Deep Dive: Inventory Correction and Demand Recovery Shape Results

Analog chipmaker Microchip Technology reported Q2 CY2025 results topping the market’s revenue expectations, but sales fell by 13.4% year on year to $1.08 billion. The company expects next quarter’s revenue to be around $1.13 billion, close to analysts’ estimates. Its non-GAAP profit of $0.27 per share was 13.2% above analysts’ consensus estimates.

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Microchip Technology (MCHP) Q2 CY2025 Highlights:

• Revenue: $1.08 billion vs analyst estimates of $1.06 billion (13.4% year-on-year decline, 1.7% beat)
• Adjusted EPS: $0.27 vs analyst estimates of $0.24 (13.2% beat)
• Adjusted EBITDA: $285.8 million vs analyst estimates of $243.4 million (26.6% margin, 17.4% beat)
• Revenue Guidance for Q3 CY2025 is $1.13 billion at the midpoint, roughly in line with what analysts were expecting
• Adjusted EPS guidance for Q3 CY2025 is $0.33 at the midpoint, above analyst estimates of $0.32
• Operating Margin: 3%, down from 17.7% in the same quarter last year
• Inventory Days Outstanding: 213, down from 251 in the previous quarter
• Market Capitalization: $32.89 billion

StockStory’s Take

Microchip Technology’s second quarter saw a negative market reaction, with management attributing results to ongoing inventory correction, sequential sales growth across all product lines, and cost reduction efforts. CEO Stephen Sanghi emphasized that the company’s broad-based recovery was driven by improvements in both microcontroller and analog segments, as well as a substantial reduction in inventory levels. Sanghi acknowledged recent workforce reductions and pay cuts, noting, “18,000 employees of Microchip worked all last year on a pay cut, have not received a bonus or a salary increase in 1.5 years and suffered through a gut-wrenching global layoff earlier this year in March.”

Looking ahead, Microchip Technology’s guidance is underpinned by what management described as a ‘trifecta effect’—ongoing normalization of distributor and direct customer inventories, improving backlog, and early signs of demand recovery in key end markets. Sanghi cautioned that while lead times for some products are beginning to lengthen, the company is not yet seeing speculative buying or significant pull-forward activity, saying, “We are still shipping below normalized end market demand across most of our markets after 2 years of inventory correction.” Management expects further gross margin improvement as inventory write-offs and underutilization charges decrease over coming quarters.

Key Insights from Management’s Remarks

Management pointed to broad-based sequential growth, a shrinking sell-in versus sell-through gap in distribution, and early adoption of AI-driven tools as key contributors to quarterly performance.

• Inventory reduction drove margin recovery: The company made notable progress lowering inventory, with CFO Eric Bjornholt highlighting a $124 million sequential reduction and a drop in inventory days to 214. This has started to ease inventory write-offs and underutilization charges, which together had a 12 percentage point impact on non-GAAP gross margin this quarter.

• Distribution and direct customer normalization: CEO Stephen Sanghi reported that distributor sell-in is catching up to sell-through, supported by a narrowing gap compared to prior quarters. Direct customer inventory is also declining, though management cautioned this process is not yet complete and could take several more quarters to fully normalize.

• AI tools improve engineering productivity: Management introduced an AI coding assistant for microcontroller customers, claiming up to 40% productivity improvements in programming tasks. The upcoming addition of AI agents, previewed at the company’s Masters technical conference, is expected to further accelerate customer development cycles.

• Defense and aerospace segment strength: Rich Simoncic, COO, cited continued strength in defense-related demand, supported by new product qualifications and expansion in radiation-tolerant FPGAs. These devices, essential for aerospace and military applications, are seeing adoption due to power savings and enhanced security features.

• Back-end supply chain pressures: The company is experiencing moderate lead time increases for certain products due to substrate and packaging constraints. Management is advising customers to place orders with longer visibility to avoid shortages, but clarified that this is not a return to prior non-cancelable order practices.

Drivers of Future Performance

Microchip Technology’s forward outlook is shaped by continued inventory normalization, lead time developments, and the pace of demand recovery in core end markets.

• Inventory and margin leverage: Management expects further gross margin improvement as write-offs and underutilization charges decline with ongoing inventory reductions. Sanghi stated that the company aims to return to its long-term non-GAAP gross margin target of 65%, as factory utilization gradually increases beginning in the December quarter.

• End market demand normalization: Sales growth is expected to remain above traditional seasonal patterns, particularly as the automotive segment, which management identified as lagging, begins to recover. The company’s exposure to defense, AI, and data center infrastructure is expected to help offset variability in industrial and automotive markets.

• Supply chain and order visibility: While some lead times have begun to extend, management is urging customers to increase backlog visibility to 12–16 weeks. This is intended to prevent shortages and support stable manufacturing output, but the company is avoiding binding, non-cancelable order policies to reduce the risk of overbuilding inventories.

Catalysts in Upcoming Quarters

Looking forward, the StockStory team will be monitoring (1) continued progress in reducing overall and distributor inventory days, (2) the pace at which automotive and other lagging end markets show demand normalization, and (3) whether lead time extensions remain manageable or become more widespread. Execution on AI-driven product enhancements and the ability to maintain margin recovery as utilization ramps will also serve as critical markers of Microchip Technology’s near-term trajectory.

Microchip Technology currently trades at $61.80, down from $66.24 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free).

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